A Case Against Excessive Wealth Inequality

I try to present all sides of an argument and leave the opinions to my readers, but in this case I’m going to take a stand. I believe wealth inequality is harming the United States and the rest of the world.

This was supposed to be a lighthearted piece in which I provide the findings of an Oxfam International report about wealth distribution which highlighted the holdings of the 62 richest people in the world, and then describe the actions of the 63rd richest person who is planning to move the St. Louis Rams football team to Los Angeles. Upon further research, however, I discovered that Stanley Kroenke is not the 63rd richest person as erroneously reported by Ben Bergman during a story on NPR’s Weekend Edition Saturday, but rather is worth $6.3 billion. That makes him tied for 225th richest with Sandra Ortega Mera of Spain who is the daughter of the 4th richest person.

More importantly to the change in tone for this post is the research into wealth inequality that I conducted. In the United States, there is an argument – generally by political conservatives – that there is no reason to worry about income and wealth inequality because everyone benefits from an improving economy. While that seems logical, the facts show that while the rich are getting richer, the poor are getting poorer. That shouldn’t be happening if the improving economy lifts all boats. Something more serious is happening and I have concluded that income and wealth inequality is a factor.

The Report

On Sunday, Oxfam International released a report (An Economy for the 1%) in which the researchers found that the top 62 wealthiest individuals in the world own as much as the poorest 3.6 billion people. Oddly enough, I didn’t find that statistic very shocking because the numbers are just too hard to wrap one’s head around; I don’t have the perspective to make that meaningful. A little further in the report, however, I found that perspective. In 2010, the wealth of the bottom half of the world was equal to the wealth of the top 388 individuals. Now it’s just the top 62. That is a big change in 5 years.

The Wealthy

For Americans, the large economic downturn that has been dubbed The Great Recession lasted from December 2007 through June 2009. As with most, if not all economic downturns, the stock market is a leading indicator of a recovery and that was true in this case. Since the bottom of the market on March 2, 2009, the S&P 500 had risen 199% (tripled) by the end of 2015. That, of course, benefits the wealthy who are much more likely to own stocks and lots of them.

Additionally, high end real estate has greatly increased in value during the same period. As my wife & I were headed from Manhattan to LaGuardia Airport in a taxi last week, I heard that the average Manhattan apartment is now selling for $1.95 million. In 1995, we sold a studio coop apartment with terrace in a 24-hour doorman building on 16th Street and 3rd Avenue for $85,000. It is now worth about $750,000. Desirable places to live are experiencing high ownership rates and high prices. This also benefits the wealthy who have the funds to purchase in these desirable locations.

So it makes sense that the wealth of the top 62 people in the world has increase by 44% in the past 5 years to $1.76 trillion. In the U.S., the unemployment rate has dropped from 9.3% at the beginning of 2011 to 5.0% at the end of 2015 – a 46% improvement in 5 years. This increased employment generates more consumption, which generates more jobs and the overall economy improves. One would expect that those with less wealth would benefit from this economic improvement, and while their savings accounts would not grow as much or as quickly as the country’s richest citizens, they would become a little wealthier.

The World

A growing American economy tends to help improve the economies of our trading partners as well because we are a consumer society. We import $40-45 billion more each month than we export and those imported goods and services support manufacturing facilities in China and Japan, call centers in India, wineries in France, and many businesses and farms in Canada, our largest trading partner. When the U.S. does well, the rest of the world tends to benefit.

The pattern is changing, however. This is partly due to conditions in the US and partly due to situations in Europe, the Middle East and China. First the rest of the world. While the U.S. was emerging from the recession, Europe was mired in a debt crisis which was the result of similar behaviors that led to the housing bubble in the US – irrational spending. For Europe, that spending was fueled by a large drop in interest rates with the introduction of the Euro in 1999, and then by the low interest rate policy of most developed countries as a way of stimulating the economy.

Governments and individuals in Europe borrowed heavily. People purchased cars, houses and other property, and banks backed risky financial ventures. In Spain, banks controlled by the Roman Catholic Church built luxury seaside condo buildings as investment property. When the recession led to job losses, the banks were left holding massive amounts of bad debt and were at risk of going out of business. Governments made guarantees to keep the banks operating and consequently, some of those countries had insolvency problems. These debt problems still plague some countries and overall economic growth in Europe has been reduced.

In the Middle East and North Africa: war, refugees, and for some countries, low oil prices. This turmoil will last for many more years – except, perhaps, the low oil prices – and will probably need more intervention from developed countries before things will stabilize.

The Chinese government has fueled a significant portion of the Chinese economy for years through massive public works projects – roads, airports, etc. Last year, they attempted to shift the economy to one less dependent on government spending and more on personal consumption. The Chinese people, however, are not very comfortable with irrational consumption; they are savers. They also have the example of the U.S. housing bubble and the European debt crisis to show them the potential problems with making purchases beyond a person’s means. Still, with the reduction in government spending on public works projects, the Chinese economy is growing more slowly and the rest of the world is nervous.

So, these external factors do have an adverse effect on the US economy, but not enough to explain the low rate of wage growth and other factors plaguing low income workers. Since the U.S. is a consumer economy, our own spending should generate the growth that would lift all boats – help all people. This is where I believe wealth inequality hurts the country.

The Middle and Lower Income Classes

While it’s common knowledge that the rich are getting richer, there is also compelling evidence that the poor are getting poorer and the middle class is shrinking. Why is this the case? While the middle class has been shrinking, both the upper income and lower income classes have been growing. The significant reasons for the move from the middle class up to the upper income group is demographic changes, pensions and social security.

We now have Baby Boomers retiring at a rate of 10,000 a day. These are the older members of that generation and most have benefited from riding the wave of the large, consumer-driven population behind them. Many have traditional pension plans in which their employers invested an average of 6% of their wages toward retirement instead of the 1.5% average for 401(k) plans that most full-time workers have today. So these early Baby Boomer retirees have social security and pension income, plus benefited from high interest rates in the 70’s and 80’s and impressive stock market performance in the 90’s through today.

Going from the middle class to the lower income group is a little easier to see. While the unemployment rate has been reduced substantially over the past 5 years, wage growth has been anemic. During that same period, certain costs have increased greatly including rents. Nearly 8 million homes were lost to foreclosure following the bursting of the housing bubble and the people who lost their homes can no longer get approved for a mortgage. Simply from a supply and demand standpoint, this surge of renters (up from 31% of all US households a decade ago to 37% now) has allowed landlords to charge significantly higher rent than just a few years ago. Household incomes have also fallen to 1995 levels so a greater portion of a working person’s income goes to living expenses, especially housing. Other factors can knock someone out of the middle class including major medical conditions or job loss.

What surprised me in the Oxfam report is that the wealth of the bottom 3.6 billion people fell by over a trillion dollars during the last 5 years – a 41% decrease. This now makes sense. Lower income workers in the US and abroad earn less and pay more of what they earn for housing and food. Gas prices have come way down, but only a small percentage of the poorest 3.6 billion people would have a car, so there’s little benefit there.

The Case Against Excessive Wealth Inequality

So why have I concluded that excessive wealth inequality is a bad thing?
1. Not all boats are being lifted. In fact, costs for lower income individuals are rising much faster than income.
2. To whom are these payments made? #64 richest individual Donald Bren (50,000 apartments), #216 richest Stephen Ross (large scale housing projects in New York, although some are affordable housing), #255 Stan Kroenke (30 million square feet of property – largely retail, but I wanted to get back to Stan, so here he is), and me (three apartments). So the increase in wealth for the top 62 richest people in the world is generally at the expense of the poorest half of the population.
3. In my opinion, this financial stress on the middle and low income classes erodes a foundation of our society and cannot continue indefinitely without social consequence (not sure how severe, but would rather shore up the foundation than deal with the collapse).

About tonyj126

I'm a 50+ married man who always seems to have a large backlog of work to do, but also a lot of flexibility in my schedule. Much of the work I do is volunteer or taking care of extended family members. I suffer from, as my priest calls it, "the sin of self-sufficiency," which means I can figure out how to do most things myself, and consequently, reduce the need for community to solve problems. As a logical extention (at least to me), I find myself called to comtemplate the country's and the world's woes and offer my observations. I hope someone out there will find them useful.
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2 Responses to A Case Against Excessive Wealth Inequality

  1. Jacob Ethans says:

    So in your scholarly opinion, what form should this social consequence take in order to sufficiently bring positive change to the balance of wealth?

    Like

    • tonyj126 says:

      Not sure yet, but it should be designed to shore up the middle class. David Brooks of the New York Times said something interesting a week ago. This isn’t an exact quote, but it was something about how the Republican Party has had the support of middle class white men for years and they’ve done nothing for them. That is why outsiders like Trump are doing so well.

      The foundations of the U.S. economy and society are being weakened by 1) the loss of good-paying jobs for those without college degrees, 2) excessive debt for both students and their middle class parents in order to obtain a degree (not an issue for high and low income parents of college students, although the graduates will likely have a lot of debt), 3) the endless stream of negative news & commentary blaming those with whom they disagree for all the problems in the country. The U.S. has been experiencing a steady economic recovery, but it’s hard to tell from the loudest sources available. Considering we seem to be in an unending presidential campaign season, this pattern is not likely to change. The message is, “Things are horrible – only I can fix it.”

      The conservative view is to cut taxes and benefits and watch the economy flourish. That does not seem to be a good strategy to me. There is a scientific paper by economist Owen Zidar, Ph.D., which correlated tax cuts and increases with job growth over the two years following the change. There was almost no job growth when those tax cuts went to the top 10% income earners (slope of graph: -0.1%), but there was significant job growth when those cuts went to the bottom 90% (slope: -5.1%). With a 1% of GDP tax cut for the bottom 90% based on income, there is a 5% increase in jobs over the following two years.

      Sorry about the long response, but I’ve been thinking about this a lot.

      Like

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